Debt Triage: How to pick and choose which bills to pay

Have you ever sat staring at a bunch of bills and debts, and suddenly realize you don’t have enough funds in your checking to pay all of them? And on top of that, you know your next paycheck won’t cover both rent AND the bills you couldn't afford to pay last week?

How do you pick and choose who gets paid, when you don't have the funds to pay for everything? Debt Triage can help you figure that out in 4 Stages.

What is debt triage?

1. Debt: something, typically money, that is owed or due.
2. Triage: (in medical use) the assignment of degrees of urgency to wounds or illnesses to decide the order of treatment of a large number of patients or casualties.
3. Debt Triage: Deciding who gets paid first due to the urgency. Additionally, putting order to the rest of the debts.

At the end of the debt triage process, all debts should have the status of 'Current/Paying as Agreed,' 'Charged-Off,' or 'Paid/Settled in Full.' 

How do you take several delinquent/past due accounts, and decide which ones you have to pay NOW, and which ones can afford to wait until cash flow is a little better?

The 4 Stages of Debt Triage:

1. Avoid Legal Action
2. Save the accounts you can (Past due)
3. Negotiate Closed accounts, or let them charge off
4. Settle everything else (Charged-off)

Let's look more in-depth at each stage.

Stage 1: Avoid Legal Action 
Look at all debts and/or expenses, and immediately address anything facing potential legal action.

Legal action* could result in:

• Bank repossess/foreclose on property
• Creditors place a lien on your property through the courts
• Wage Garnishment through your employer's payroll/HR department
• Bank Garnishment direct from your personal checking/savings accounts
• The government seizes your Federal Tax refund to pay debts (taxes/student loans)

Legal action refers to the fact something will be taken from you as a consequence of non-payment. This is why we address these accounts first. If at any point in the future, a charged-off debt carrier starts talking about using one or more of the above actions, it's time to get into a payment arrangement.

Stage 2: Save the accounts you can (past due)
Once you have made payment arrangements to avoid legal action, look at debts that are Past Due. If the account has not yet been closed, see if you can afford the minimum payment to bring those accounts current. These payments can be pretty high but some creditors are willing to work with you IF YOU CALL them before the account closes. (Accounts typically* Close on the 90th day past due.)

Your account is *30-89 days past due (1-3 months)

GOAL: Reduce the minimum amount needed to bring the account current.

HOW: Do this by talking to your creditors. Briefly explain why you are having a financial hardship, and ask if they can help you out by. . .

1. Remove/waive any fees
2. Temporarily reduce the interest rate
3. Offer hardship payment agreements over several months to help you get caught up over time

TIP: Once you bring your account current, make sure you have the available funds to keep making the minimum monthly payment going forward.

Stage 3: Negotiate Closed accounts, or let them charge off
If you are unable to pay past due balances they will eventually become Closed accounts, or 90-179 days past due (3-6 months).a

Once the account is closed, you can never use this line of credit again. You are more than likely paying very high interest as well as late/over-limit fees assessed every month.

This has to STOP if you are to have any chance of paying down the balance. If the creditor will not work out a payment plan that stops fees AND lowers or stops the interest for a period of time, then it might be better for the account to Charge off. Yes, this goes against your credit score, but in most cases, it stops the balance from getting any larger.*

Your credit already took a huge hit since it takes having 6 months or more of non-payment to become charged off. Don't worry, letting an account charge off essentially "stops the bleeding" so the balance doesn't continue to grow. Allowing your payments to finally have an impact.

GOAL: Reduce the minimum amount needed to bring the account status to ‘current/paying as agreed.'

HOW: You can do this by talking to your creditors. Briefly explain why you are having a financial hardship, and ask if they can help you out by. . .

1. Remove/waive any fees
2. Temporarily reduce/eliminate interest rate
3. Offer hardship payment agreements over several months to help you get caught up over time

TIP: If you are working with a creditor who is unable or unwilling to reduce fees or interest rate, even if it’s just for a few months, then you may want to consider letting the account ‘Charge-off.’

At least your balance *shouldn't get any larger. Once it charges off, the balance in full becomes due, no more interest will be applied, and it is usually sent to a 3rd party debt collector.

Step 4: Settle everything else (Charged-off)
Once debts have been charged off, your goal should be to save up as much cash as possible, so you can start settling these balances. Settling debts means paying less than the full balance as payment in full to resolve the debt. I do not advise making small monthly payments to Charged-Off debt UNLESS the payment avoids Legal Action.

Your account is (*usually) 180+ days past due (6+ months) This is the lowest priority to pay UNLESS the creditor starts talking about legal action.

GOAL: Avoid legal action such as wage/bank garnishments as well as judgments against any property, long enough to save up the funds to negotiate with creditors.

Instead of paying monthly payments, save up those funds so they build up to a large enough sum to start settling them for less than the full balance.

How: Settlement

1. Save as much cash as possible in a checking account that is not your primary account where you get paid/pay bills. This is the account you will pay settlements from.
   
   
2. Call creditors to get their best settlement offer if paid in full by the end of the current month.
   
   
3. If you are going for credit building: pay debts off from smallest balance to largest balance (debt snowball). *Remember: FOCUS first on debts that are still with the original creditor.  We only pay/settle charged off debt if they are threatening legal action.
   
   
4. If you are worried about lawsuits because you own property (lien) or W2 employment (garnishment), then I advise you to focus on your higher balance charge-offs first.

TIP: The older the debt is from the charge-off date, the larger the settlement offer you can usually get.

TIP: Settling thousands of dollars in debt in a short amount of time could have tax consequences. Any time you save more than $600 off the total balance in a settlement, you have to claim the unpaid portion as income for the year. You will likely receive a 1099 C from the creditor to file with your taxes.

If you have several creditors in various stages of delinquency, it's difficult to even know where to begin. My hope is this blog will guide you to taking action, and avoid the pain of legal action or worse going through an expensive and lengthy bankruptcy process.

Click below for a couple FREE downloads to help you inventory your debt and keep track of which creditors are offering what. 

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*Situations vary from creditor to creditor or from state to state.
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Disclaimer: This content is for informational purposes only. All materials and information do not constitute financial advice. Always consult a financial professional before making financial decisions.

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Author - Kyra Jones

Debt & Financial Crisis Coach